Western Economic Developments
August 1996
Please note: This version of Western Economic Developments
contains text only. To view the indicated graphs and tables, please
download the Adobe Acrobat PDF version of this document.
District economic activity accelerated in the second quarter, owing
to a pickup in growth in California and Washington states. Economic conditions
in Hawaii appear to have stabilized, after deteriorating last year, and
what has been a slow-growing Alaska economy is beginning to show renewed
vigor. Elsewhere in the District, relatively rapid growth continued in
Oregon and in the Intermountain states of Arizona, Nevada, Idaho, and
Utah. However, new signs of possible future slowing in some of these rapidly-growing
states emerged. The torrid pace of construction employment growth has
cooled a bit in several areas, and the locus of manufacturing and business
service job growth appears to be shifting towards California and Washington
states.
Overall District payroll employment increased at a 3-3/4 percent annual
rate in the second quarter, up from roughly 3 percent in the previous
quarter and from 2-3/4 percent in 1995. In California and Washington,
job growth accelerated last quarter about 1 percentage point at an annual
rate. Nevada, Idaho, and Utah each posted second quarter job growth in
excess of 7 percent at an annual rate. In Arizona and Oregon, employment
growth last quarter was near 3-1/2 percent at an annual rate.
Increased employment in California accounted for about one-half of the
roughly 200,000 jobs added to District payrolls between March and June
of this year. Washington state employment increased by about 20,000 jobs
over the course of the second quarter, and each of the other District
states except Alaska and Hawaii also posted gains of roughly 10,000 to
15,000 jobs.
Among the major sectors, the pickup in second-quarter District job growth
was most evident for construction and manufacturing. Construction employment
increased about 10 percent at an annual rate, owing partly to an increase
in California of 12 percent at an annual rate. In contrast, second-quarter
construction job growth slowed a bit in Arizona and Oregon and was little-changed
in Utah, after a large rise. Earlier this year, district manufacturing
employment increased about 2-1/2 percent at an annual rate in the second
quarter, up from a 2 percent pace in the first quarter and a 1 percent
gain during 1995. California's manufacturing sector expanded at a 2-3/4
percent annual rate in the second quarter, whereas Washington manufacturing
employment increased about 5 percent at an annual rate. Employment in
the business service sector, which includes software development and other
computer-related services, also posted large increases in California and
Washington during the second quarter.1
Fast expansion of high-technology businesses has fueled rapid growth
in parts of California, the Pacific Northwest, and the Intermountain states.
An improved outlook for high-tech businesses contributed to a large run-up
in high-tech stock prices in early 1995. More recently, diminished prospects
for the profitability of some types of high-tech manufacturing and a dropback
in the broader equity market apparently have contributed to a decline
in some high-tech firms' equity prices. The less favorable news on the
earnings outlook underlying the recent relatively large decline in some
technology stock prices raises the question of whether fast expansion
of high-tech businesses is likely to continue to fuel rapid growth in
western states.
In the broader equity markets, the dropback in the NASDAQ national market
composite was apparent by early June. The price decline accelerated in
early July, and the composite price index remained low through late July,
before rebounding in early August. The S&P 500 index--which focuses
on larger capitalization stocks traded on several major exchanges--has
experienced less volatility than the NASDAQ this year, but there is great
similarity across the two indexes in recent moves and in the cumulative
changes in prices since the beginning of the year.
Standard and Poor's recently began making available additional equity
price indexes which areuseful for studying high-technology stock developments
in more detail. The readily available data pertain to closing equity prices
at month-end and include an S&P 1500 composite index, which augments
the large-capitalization firms in the S&P 500 with value-weighted
composites of 400 middle-capitalization firms and 600 small-capitalization
firms traded on various exchanges. Although the S&P 500 and S&P
1500 have exhibited a similar pattern since the beginning of 1995, it
is useful to refer to the broader composite (S&P 1500) and its industry
group subcomponents for better representation of high-tech industries
than in the S&P 500.
The composite equity price of the technology stock group of the S&P
1500 posted a 48.7 percent increase in early 1995, was little changed
in the latter half of last year, and increased a bit further in early
1996 before dropping back in June and July. Owing to the strong gains
in early 1995, the cumulative increase since January 1995 is larger for
technology stocks than for the overall market indices.
In early 1996, stock analysts began revising downward their earnings
forecasts for a broad range of computer-related companies. In the first
few weeks of July, the sell-offs of technology stocks coincided with announcements
of weaker-than-expected earnings at a major hardware manufacturer--Apple--component
producers Motorola and Texas Instruments--and a supplier to semiconductor
manufacturers--Applied Materials. Although the market was cheered toward
the end of last month when other high-tech firms--notably industry giants
Intel and Microsoft--announced solid recent earnings performance, other
news--such as Hewlett-Packard's announcement of disappointing orders for
a wide range of products--has emerged as a reminder that recent fortunes
differ substantially on a company-by-company basis.
To sort through the diversity of experience, it is helpful to review
the performance of the various subgroups of computer-related technology
stocks. Since January, 1995, the best performance has been for producers
of networking equipment and software, two business lines which could benefit
the most from the explosive growth of Internet connectivity and content,
such as multi-media products. Producers of networking equipment have experienced
a 108 percent increase in equity values over the last year and a half,
and software company stock prices have appreciated 75 percent. Although
both these groups of technology stocks experienced some weakness in July,
they remained among the highest performing stocks in terms of cumulative
returns over longer time periods.
Makers of computer hardware, as a group, experienced a 49 percent increase
in equity values from January, 1995 to July, 1996. Makers of computer
peripherals experienced even faster stock price appreciation than this
through May, but a dropback in June and July left the cumulative increase
at 35.6 percent, which is roughly the rate of increase in the broader
S&P indexes.
Some of the largest increases in equity prices in early 1995 were for
makers of semiconductors and equipment for semiconductor manufacturing
plants. As many firms rushed to build capacity in a tight chip market,
the composite stock price index for semiconductor manufacturers increased
94.4 percent in the first half of 1995, and equipment suppliers' equity
prices increased 138.8 percent! In the latter half of 1995, as some additional
worldwide semiconductor capacity began to come on line, and demand growth
for memory chips was not as strong as anticipated, product prices began
to slide, and semiconductor and equipment manufacturers equity prices
began to retrace part of the earlier run-up. Recently, equity prices have
stabilized for the overall semiconductor group, which includes both makers
of central processor chips, such as Intel, who have continued to report
relatively strong earnings, and makers of (DRAM) memory chips, whose earnings
generally continued to slide.
Stock prices of manufactrers of communications equipment--such as cellular
phones--and of distributors of electronics components--such as memory
chips--are among those which have underperformed relative to both the
broader technology stock group and the S&P 500 and S&P 1500 composite
indexes over the last year and a half. However, these types of businesses
were not a particularly notable source of weakness in the most recent
period, and they are not a large fraction of the overall high-tech industry.
In summary, rapid growth of network-related segments of the high-technology
industries has been mirrored in substantial increases in stock prices
of firms making networking equipment and software. Makers of hardware,
peripherals, and semiconductors also have posted equity price gains over
the last year and a half that at least match those in broader stock market
indexes, although there has been a partial reversal for some firms in
late 1995 or early 1996.
In and of itself, this pattern does not tell us much about the outlook
for high-tech businesses in various western states. At least three major
issues remain: (1) whether this pattern (of faster growth in software
development and networking equipment than in other types of hardware and
components) is likely to continue, (2) whether the geographical distribution
of activity in these various businesses differs substantially by state,
and (3) whether determinants other than product composition also matter
a lot in explaining performance of high-tech businesses within particular
states.
Many high-tech firms have establishments in several states and in other
parts of the world. Although we do not have comprehensive, readily-available
data on the geographic distribution of the operations of the high-tech
firms in the S&P technology group, other sources at least indicate
the states which some high-tech firms use for their business address,
which is usually where the corporate headquarters is located. Among computer-related
high-tech firms, electronic filings with the SEC readily identified 53
firms with California business addresses. The only identified firms headquartered
in Idaho and Utah are Micron and Novell, respectively. Oregon is the headquarters
for three identified firms (Mentor, Sequent, and Lattice), and Microsoft
and a much smaller technology firm (Wall Data) are headquartered in Washington
state.
Composite (market-value weighted) indexes of high-tech computer-related
stock prices by state show some interesting patterns. The indexes for
Idaho, Oregon, and Utah have declined sharply over the past year and a
half, including declines in the most recent six month period. In contrast,
Microsoft's continued stock price appreciation shows through in the data
for Washington state. The composite stock price index for California-headquartered
firms also has increased a lot over the past year and a half. The California
index jumped sharply in the first half of 1995, edged down in the second
half of last year, and rebounded a bit so far this year. Given the diversity
of high-tech businesses headquartered in the state, the pattern in the
index for California is somewhat similar to that in the overall S&P
technology stock index. However, California firms have moderately outperformed
the broader technology group over the past year and a half, in part reflecting
the greater prevalence of networking equipment and software development
firms in the state.
Going beyond the formal data, other considerations suggest that the
composition of high-tech manufacturing and business service employment
growth may be shifting toward major urban centers in parts of California
and the Pacific Northwest and away from the smaller cities there and in
the Intermountain states. Many high-tech firms with multi-state operations
have geographically concentrated their research and development activities
in California (primarily in the San Francisco Bay Area) while locating
manufacturing fabrication facilities for more mature productlines in places
with lower costs for key inputs such as production worker labor, electricity,
and water. Elsewhere in the West, there is a notable research and development
cluster (anchored by Intel) near Portland, Oregon, and Microsoft's presence
near Seattle, Washington has helped establish a research and dvelopment
cluster there. Because this pattern of geographic specialization appears
likely to continue, the intensity of research and development activity
relative to production of mature products is important to the regional
outlook.
Recently, the pace of technological advancement and of growth in market
penetration has been particularly rapid for network-related products.
Internet and corporate "intranet" usage reportedly has grown
tremendously over the past year, and the full spectrum of high-tech computer
firms--from software developers to hardware manufacturers and makers of
components and peripherals--appear to be scrambling to develop new product
lines which will remain competitive (or be an industry leader) as further
network developments unfold. The industry appears to be going through
a period in which the potential returns to research and development activity
are very large, so this augers well for high-tech related growth in those
parts of California and the Pacific Northwest which have a research and
development focus. Concurrently, the rapid pace of technological change
also is rendering some product lines and production methods obsolete;
until uncertainty diminishes about which products and production methods
are the most successful, the rapid technological change limits the incentives
to expand mass-production at some of the fabrication plants in the inland
areas.
Economic growth picked up in some key sectors in Alaska
in recent months. Payroll employment increased about 4 percent at an annual
rate in the second quarter, after edging down in early 1996. A pickup
in government, services, and retail and wholesale trade job growth offset
continued large declines in manufacturing employment. Construction employment
growth also was strong in the second quarter, bringing the gain over the
past twelve months to about 13 percent.
Relatively rapid economic growth continued in Oregon,
but the pace was a bit slower in recent months. Payroll employment increased
3.2 percent at an annual rate in the second quarter, down about 1 percentage
point from the first quarter pace. Construction employment continued to
post double-digit gains, but its growth slowed compared with the 18 percent
annualized pace of the first quarter. Growth of services jobs also slowed,
and government sector employment was little changed. Manufacturing employment
fell about 3 percent at an annual rate in the second quarter, as growth
in computer and electronic industries slowed and payrolls were trimmed
in a broad range of other manufacturing industries.
Various producers of computer-related equipment and components are among
the largest manufacturing employers in the Portland metropolitan area.
Intel Corp. has the largest facility, with about 7,200 workers, and Tektronix
Inc. and Hewlett-Packard Co. also are among the five largest Portland
area manufacturers, with more than 2,000 workers each. Intel Corp. is
one of several semiconductor manufacturers with expansions underway in
the Portland area, and recent corporate reports show continued strong
growth in the firm's core business lines. However, other firms with expansion
plans for Oregon have fallen victim to continued low prices for some types
of memory chips; for example, Fujitsu Ltd. is delaying the expansion of
its Gresham, Oregon memory chip fabrication facility.
Economic growth in Washington state picked up in the
second quarter, and the near-term outlook looks bright. Payroll employment
increased at almost a 4 percent annual rate in the second quarter, following
a 2-1/2 percent gain in the first quarter. This is well above the 1-1/2
percent pace of job growth in 1995, when construction employment was flat,
and manufacturing employment fell 2 percent, owing largely to cutbacks
at Boeing Aircraft Co.. So far this year, construction employment has
increased about 3 percent at an annual rate, and manufacturing payrolls
also have expanded, owing to a rebound in the aircraft industry and to
additional jobs at makers of computers and electronic equipment and components.
Boeing's cutbacks in production and employment last year were partly
in response to a declining backlog of unfilled orders for airplanes. Net
new orders for aircraft had slumped from 236 planes in 1992 to 36 planes
in 1993 and rebounded only to a 150 airplane annual rate in 1994 and the
first half of 1995. In the subsequent four quarters, Boeing received 327
net new orders for airplanes, and the backlog of unfilled orders increased
substantially. Now, Boeing is ramping up production and plans to continue
increasing output of key planes through 1998.
Relatively strong economic growth continued in Arizona
in the second quarter, albeit at a slightly slower rate than earlier.
Payroll employment increased at an average annual rate of about 3-1/2
percent in the second quarter, down a bit from the 5 percent average pace
in the preceding two quarters. The earlier gains were led by large increases
in construction, manufacturing, and business services employment, which
have slowed in recent months. However, this was partly offset by a pickup
in government sector job growth.
Given the earlier strong gains in private sector economic conditions,
state government budget analysts indicate that the state's capacity to
raise general fund revenues has increased about 11 percent this fiscal
year, taking last year's tax laws as given. However, recent legislative
changes substantially reduce the scope of the individual and corporate
income tax bases, limiting the actual revenue gains to about 4 percent.
State government payrolls are expected to expand only moderately in the
near term.
In California, economic growth accelerated in the second
quarter. The official estimates of payroll employment showed an average
gain of 3 percent at an annual rate in the second quarter, up about 1-1/2
percentage points from the average pace in the preceding two quarters.
The recent pickup in job growth was broad-based, with construction, manufacturing,
and business service employment posting particularly large gains. Of the
163,000 jobs added to state payrolls so far this year, about 35,000 jobs
were in business services, which includes software development and other
computer-related services. Given the increased overall job availability
in recent months, the state unemployment rate is estimated to have fallen
about 1/2 percentage point over the course of the second quarter.
Federal government jobs in California have continued to decline this
year, and state and local government payrolls have been expanding more
slowly than those in the private sector. However, some local fiscal stimulus
is expected in the near term; the Governor and Legislature enacted a state
government budget which includes a 4 percent increase in expenditures
from the General Fund this year, with particularly large increases in
funding for K-12 education. Resulting increases in payroll jobs are likely
to begin appearing in the September job count. Further ahead, however,
the state is likely to experience a fiscal drag from reduced federal funding
for welfare programs, as recent legislation reduces immigrant eligibility
for benefits.
Economic conditions appear to have stabilized in Hawaii.
Non-agricultural employment was little changed in both the first and second
quarter, after falling 1-1/2 percent over the course of 1995. So far this
year, a continued loss of construction jobs has been offset by employment
increases in the government sector, at hotels, and in retail trade.
Hotels and retail stores are benefiting from increased tourism activity.
Hotel occupancy rates have improved this year, and the number of visitors
in early 1996 (through April) was up 8.4 percent relative to the same
period a year earlier, with the largest gains in eastbound travel. Overall
state gross business receipts from retailing were strong in the first
quarter, at a level 14 percent above a year earlier. State government
general excise tax collections also began to increase noticeably in early
1996.
o
Economic activity in Idaho continued to expand rapidly
in the second quarter, although recent developments suggest that the fast
current pace of growth may not be sustainable. Nonfarm payroll employment
increased at an average annual pace of 12 percent in the second quarter,
following increases of about 3 percent in 1995 and in the first quarter
of 1996. The recent pickup in job growth was broad-based, with particularly
large gains in construction, services, and government sector employment.
Residential building permit issuance was up, and new home sales were
strong through June. However, housing markets around the state are reported
to have softened a little in July, and other recent economic indicators
also are less bright than the payroll figures. Although the state unemployment
rate is low, at 5.2 percent in June, it actually edged up over the course
of the second quarter. Also, job growth in the state s high-tech manufacturing
sector is likely to taper off or decline in coming months. On July 10th,
Hewlett-Packard announced the closure of its disk drive mechanism division,
including a facility employing 1,150 workers in Boise. Another large Boise
computer component maker (Micron Technology) recently announced a hiring
freeze, as earnings from its core semiconductor memory chip business continued
to decline.
Nevada's booming economy continued to post phenomenal
gains. Payroll employment increased about 7-1/2 percent at annual rate
in the second quarter, about the same pace as in 1995 and in the first
quarter of this year. The composition of employment growth has shifted
a bit lately, with slowing construction job gains being offset by increased
hiring for the operation of hotel-casino facilities. Construction employment
increased about 11 percent at an annual rate in the first half of 1996,
following 15 to 20 percent increases in each of the three preceding years.
Hotel employment growth picked up to an 8 percent annual pace in the first
half of this year, up from a 3-1/2 percent pace last year.
The state's key gaming sector is accelerating as additional casino facilities
come on line. In 1994, when an earlier wave of additional facilities opened,
net gaming revenues on the Las Vegas strip jumped about 20 percent. Gaming
revenues slowed to a 3-1/2 percent gain in 1995 but are expected to pick
up again this year and next as another round of resort capacity comes
on line. The effects are expected to ripple throughout the state economy
and spur continued strong growth in sectors related to gaming, such as
retail trade.
Utah continued its rapid, broad-based expansion in
the second quarter, as payroll employment increased 7 percent at an annual
rate. Construction employment edged down, but this followed a huge gain
in the first quarter. The only major sector with notably weak second quarter
job growth was the government sector, where reductions in federal employment
have been sizable.
Utah ranks near the top of all states in recent personal income growth.
Retail sales have been very strong of late, with the latest state figures
indicating double-digit increases overall.
1Due to temporary inavailability of statistical
data, the Financial Conditions section does not appear in this issue of
Western Economic Developments and will not reappear until further notice.
|
